What is a Down Payment?

What is a Down Payment?

A down payment is a lump sum that a homebuyer pays up front when purchasing their house. It represents a portion of the home’s total purchase price. The homebuyer will often take out a mortgage from a bank or another financial institution to finance the remainder of the house purchase price. The higher the down payment, the less the buyer will need to borrow to finance the rest of the house, resulting in lower monthly payments and less interest paid.

Is a Down Payment the Same as a Deposit?

Some people need clarification on the deposit and the down payment. Think of the deposit as a down payment on your down payment. The amount is typically around $10,000 but can vary depending on how serious you are about buying the home and the price. The deposit is a certified cheque or bank draft with the Offer to Purchase. This deposit will be deducted from your required down payment amount.

Before diving in, there is a lot to know about buying a home. Lean on your team of real estate professionals to ensure you’re aware of all the requirements and the options available. Your financial advisor, lawyer and real estate agent know the ins and outs of the purchasing process, so you don’t have to navigate this road alone.

How is a Down Payment Calculated?

When buying a home, the down payment is calculated as a percentage of the total purchase price. The higher the price, the higher the down payment. You can plug some numbers into a house down payment calculator found online to get an idea of how much you’ll need to save up.

Minimum Down Payment Requirements

In Canada, for homes priced below $500,000, the minimum down payment required is five percent. For homes between $500,000 and $999,999, the down payment is five percent of $500,000 plus 10 percent of the remaining amount.

Remember that these are the bare minimums required to qualify for a mortgage. However, anything below 20 per cent is a high-ratio mortgage and requires mortgage default insurance. This protects the lender in case the borrower defaults on payments. Your mortgage loan insurance can be paid upfront or added to your monthly mortgage payments.

What is Mortgage Loan Insurance?

Mortgage loan insurance, or mortgage default insurance, protects the mortgage lender in case you cannot make monthly mortgage payments. While mortgage loan insurance is required if you have less than a 20 percent down payment, a lender may still require it if you have 20 percent if you are self-employed or have a poor credit history.

Mortgage loan insurance premiums range from 0.6 percent to 4.5 percent of the mortgage amount, depending on the size of your down payment. It can be paid in a lump sum upfront or by adding it to your mortgage, in which case you will pay interest on the premium. Your mortgage lender will coordinate getting mortgage loan insurance on your behalf if you need it.

Is It Better to Put a Large Down Payment on a House?

A larger down payment now leaves more money in your pocket. We’ve already established that buyers with 20 percent or more to put down on their homes won’t have to purchase mortgage default insurance. From a long-term perspective, when your down payment is larger, your mortgage loan will be lower, and at the end of a typical 25-year mortgage amortization, you’ll be paying less interest.

However, more Canadians are in a position where they cannot afford to put a sizeable down payment on a house. Making the minimum down payment may be the only way for them to buy a house and get into the real estate market. This is not bad since a smaller down payment can free up funds for other expenses associated with purchasing the home. Ultimately, a larger down payment may be preferable, but don’t let that stop you from buying the house you want if you have the minimum funds.